Financial Services Group. Regulatory handbook

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Financial Services Group

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Introduction 3

Regulatory Timeline

4 FCA Business Plan

16 UK Regulatory Supervisors

22 European System of Financial Supervision (ESFS) Reform

24 US Regulatory Supervisors

26 Cross Financial Services

28 Banking and Securities

58 Insurance 86

Investment Management

96 Further Information

112 Status

Definition

Proposed

Proposal pending consultation to be moved forward

Drafted

Consultation papers pending formal approval and

_enactment

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FINANCIAL SERVICES GROUP REGULATORY HANDBOOK | 2015 – 2016 3

Introduction

Over the past seven years, regulation has challenged

the business strategies, operational frameworks and

functional business processes of every organisation

operating across the financial services industry.

As regulators sought to address the fundamental shortcomings that ultimately led to the global financial crisis, legislative change emanated at a global, regional and national level, covering structural reform, capital and liquidity, culture, market structures and accountability.

Despite the shift in the regulatory agenda from policy-making to implementation, financial institutions must continue to drive change as the pace of regulatory reform remains relentless.

The banking sector must address structural reform in 2015, as the Volcker Rule and ring-fencing requirements under the Banking Reform Act come into force. Furthermore, the enactment of the Senior Managers Regime will fundamentally increase levels of personal accountability in UK banking. Final preparations for the implementation of Solvency II will be at the forefront of the insurance industry. Additionally, the development of a global Insurance Capital Standard for G-SIIs and Internationally Active Insurance Groups is likely to be completed within the year; the ramifications of which are as yet unknown. Investment businesses must continue to contend with the wide-ranging reforms featured under MiFID II, as well as address the challenges regarding the reforms in the savings and pensions market.

Alongside the specific industry challenges, a number of new institutions will begin to play a role in financial services regulation in 2015. In the EU, the Single Resolution Board (SRB) will begin to work with national regulators on resolution planning, resolvability assessments and the setting of loss absorbency. Moreover, the Payment Systems Regulator will begin monitoring the UK payments markets from April 2015.

Critical to surviving in this challenging environment is an in-depth understanding of the regulatory panorama and its operational implications.

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Regulatory timeline -

Cross Financial Services

APR MAY JUN JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN

Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016

Capital Requirements Regulation and Directive (CRD IV)

Jurisdiction: EU Status: Enacted

LCR will apply Deadline for EC to submit reports on extending the scope of the CRR Provisions on capital buffers will come into force

European Market Infrastructure Regulation (EMIR)

Long stop date for reporting any derivatives for which a trade repository is still unavailable Anticipated date for variation margin requirements for uncleared derivative trades to come into effect

Financial Transaction Tax (FTT) Jurisdiction: EU

Status: Proposed

Planned FTT implementation date

The Foreign Account Tax Compliance Act (FATCA) Jurisdiction: Global Status: Enacted First UK FATCA reporting submission deadline FATCA due diligence to have been completed on pre-existing accounts exceeding $1 million held by individuals

CRS starts IRS FATCA

reporting submission deadline in respect of 2015 (Non Model 1 IGA countries to report directly to IRS) UK FATCA reporting deadline. First UK-CDOT reporting deadline

The Fourth Money Laundering Directive (MLD4)

MLD4 expected to be published in the OJ, and to come into force 20 days after publication

General Data Protection Regulation (GDPR) Jurisdiction: EU Status: Proposed Possible agreement on the draft Regulation

Market Abuse Directive Legislative Package (MAD II) Jurisdiction: EU

Status: Enacted

ESMA to deliver the final RTS and ITS on MAR to the Commission ESMA expected to consult on its guidelines under MAR FCA to publish consultation paper on amendments to the Handbook following the introduction of MAR

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Regulatory timeline -

Cross Financial Services

For dates beyond June 2016, please see individual timelines on the respective pages

Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016

Capital Requirements Regulation and Directive (CRD IV)

LCR will apply Deadline for EC to submit reports on extending the scope of the CRR Provisions on capital buffers will come into force

European Market Infrastructure Regulation (EMIR)

Long stop date for reporting any derivatives for which a trade repository is still unavailable Anticipated date for variation margin requirements for uncleared derivative trades to come into effect

Financial Transaction Tax (FTT) Jurisdiction: EU

Status: Proposed

Planned FTT implementation date

The Foreign Account Tax Compliance Act (FATCA) Jurisdiction: Global Status: Enacted First UK FATCA reporting submission deadline FATCA due diligence to have been completed on pre-existing accounts exceeding $1 million held by individuals

CRS starts IRS FATCA

reporting submission deadline in respect of 2015 (Non Model 1 IGA countries to report directly to IRS) UK FATCA reporting deadline. First UK-CDOT reporting deadline

The Fourth Money Laundering Directive (MLD4)

MLD4 expected to be published in the OJ, and to come into force 20 days after publication

General Data Protection Regulation (GDPR) Jurisdiction: EU Status: Proposed Possible agreement on the draft Regulation

Market Abuse Directive Legislative Package (MAD II) Jurisdiction: EU

Status: Enacted

ESMA to deliver the final RTS and ITS on MAR to the Commission ESMA expected to consult on its guidelines under MAR FCA to publish consultation paper on amendments to the Handbook following the introduction of MAR

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Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016

Markets in Financial Instruments Regulation & Directive (MiFID II) Jurisdiction: EU Status: Enacted ESMA to submit final draft technical standards FCA will commence formal consultation on Handbook changes to implement MiFID II ESMA to submit final ITS to the Commission Delegated acts under Level 2 must be transposed by Member States

Wire Transfer Regulation (WTR) Jurisdiction: EU

Status: Drafted

Revised WTR expected to be published in the OJ, and to come into force 20 days after publication

Securities Financing Transactions (SFT) Regulation Jurisdiction: EU Status: Proposed Trialogue discussions expected to commence European Parliament to consider SFT Regulation in plenary session TARGET2-Securities (T2S) Jurisdiction: EU Status: Enacted T2S to go live –

first wave Second wave

Regulatory timeline -

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Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016

Markets in Financial Instruments Regulation & Directive (MiFID II) Jurisdiction: EU Status: Enacted ESMA to submit final draft technical standards FCA will commence formal consultation on Handbook changes to implement MiFID II ESMA to submit final ITS to the Commission Delegated acts under Level 2 must be transposed by Member States

Wire Transfer Regulation (WTR) Jurisdiction: EU

Status: Drafted

Revised WTR expected to be published in the OJ, and to come into force 20 days after publication

Securities Financing Transactions (SFT) Regulation Jurisdiction: EU Status: Proposed Trialogue discussions expected to commence European Parliament to consider SFT Regulation in plenary session TARGET2-Securities (T2S) Jurisdiction: EU Status: Enacted T2S to go live –

first wave Second wave

Regulatory timeline -

Cross Financial Services

contd

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Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016

Bank Recovery and Resolution Directive (BRRD) Jurisdiction: EU Status: Enacted Phased UK Implementation begins Deadline for Commission report regarding the use of extraordinary public support for a failing bank

Provisions on the bail-in tool must be applied BCBS 239 Jurisdiction: Global Status: Enacted Banks identified as G-SIBs by the FSB in November 2011 must meet the Principles Benchmark Regulation Jurisdiction: EU Status: Drafted Final agreement expected to be reached regarding text of the Regulation European Parliament to consider proposed Benchmark Regulation in plenary session

Central Securities Depositary Regulation (CSDR) Jurisdiction: EU Status: Enacted ESMA is required to submit Level 2 draft RTS to the Commission

EU Banking Structural Reforms Jurisdiction: EU

Status: Enacted

European Commission's preferred deadline for the adoption of the final text of the Regulation European Parliament to consider the Regulation during this plenary session European Commission's preferred deadline for the adoption of delegated acts require under the Regulation

European Commission

Communication on Shadow Banking Jurisdiction: EU Status: Drafted European Parliament to consider proposed SFT Regulation in plenary session

The Financial Services (Banking Reform) Act 2013 Jurisdiction: UK Status: Drafted Operational launch of the Payment Systems Regulator Deadline for the completion of all relevant secondary legislation

Regulatory timeline -

Banking and Securities

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Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016

Bank Recovery and Resolution Directive (BRRD) Jurisdiction: EU Status: Enacted Phased UK Implementation begins Deadline for Commission report regarding the use of extraordinary public support for a failing bank

Provisions on the bail-in tool must be applied BCBS 239 Jurisdiction: Global Status: Enacted Banks identified as G-SIBs by the FSB in November 2011 must meet the Principles Benchmark Regulation Jurisdiction: EU Status: Drafted Final agreement expected to be reached regarding text of the Regulation European Parliament to consider proposed Benchmark Regulation in plenary session

Central Securities Depositary Regulation (CSDR) Jurisdiction: EU Status: Enacted ESMA is required to submit Level 2 draft RTS to the Commission

EU Banking Structural Reforms Jurisdiction: EU

Status: Enacted

European Commission's preferred deadline for the adoption of the final text of the Regulation European Parliament to consider the Regulation during this plenary session European Commission's preferred deadline for the adoption of delegated acts require under the Regulation

European Commission

Communication on Shadow Banking Jurisdiction: EU Status: Drafted European Parliament to consider proposed SFT Regulation in plenary session

The Financial Services (Banking Reform) Act 2013 Jurisdiction: UK Status: Drafted Operational launch of the Payment Systems Regulator Deadline for the completion of all relevant secondary legislation

European Commission to determine whether to establish limits on banks’ exposure to unregulated financial counterparties in EU legislation

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Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016

Mortgage Credit Directive (MCD) Jurisdiction: EU

Status: Enacted

Implementation of MCD

Payment Accounts Directive Jurisdiction: EU Status: Enacted HM Treasury to publish a consultation paper on draft Regulations implementing the Directive

Regulatory timeline -

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Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016

Mortgage Credit Directive (MCD) Jurisdiction: EU

Status: Enacted

Implementation of MCD

Payment Accounts Directive Jurisdiction: EU Status: Enacted HM Treasury to publish a consultation paper on draft Regulations implementing the Directive

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Regulatory timeline -

Insurance

Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 CASS 5A Jurisdiction: UK Status: Proposed FCA expected to issue a policy statement ComFrame Jurisdiction: Global Status: Drafted A revised draft of ComFrame to be issued for public consultation

Insurance Distribution Directive (IDD) Jurisdiction: EU Status: Drafted European Parliament and Council expected to adopt IDD Solvency II Jurisdiction: EU Status: Enacted Firms can begin to formally submit applications to their national supervisors for approvals under Solvency II EIOPA to submit Set 2 ITS to the Commission EIOPA to publish Set 2 Guidelines in all of the official EU languages

All firms must comply with Solvency II

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Regulatory timeline -

Insurance

Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 CASS 5A Jurisdiction: UK Status: Proposed FCA expected to issue a policy statement ComFrame Jurisdiction: Global Status: Drafted A revised draft of ComFrame to be issued for public consultation

Insurance Distribution Directive (IDD) Jurisdiction: EU Status: Drafted European Parliament and Council expected to adopt IDD Solvency II Jurisdiction: EU Status: Enacted Firms can begin to formally submit applications to their national supervisors for approvals under Solvency II EIOPA to submit Set 2 ITS to the Commission EIOPA to publish Set 2 Guidelines in all of the official EU languages

All firms must comply with Solvency II

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Regulatory timeline -

Investment Management

Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016

Alternative Investment Fund Managers Directive (AIFMD) Jurisdiction: EU Status: Enacted ESMA to finalise guidelines on asset segregation ESMA to provide an opinion on the functioning of a number of the changes included in the AIFMD Commission may adopt delegated regulation regarding when passports for non-EU AIFs and AIFMS will be available

European Long-Term Investment Funds Regulation (ELTIF)

ESMA to submit

draft RTS ELTIF regulation starts to apply

Client Assets Review Jurisdiction: UK Status: Enacted The remaining rules and guidance announced in PS14/9 come into force

Regulation on Key Information Documents for PRIIPs

Jurisdiction: EU Status: Drafted EIOPA to deliver technical advice on delegated acts relating to temporary product intervention powers

ESMA, EBA and EIOPA to consult on draft RTS for the content, presentation and calculation of information in the KID

ESMA, EBA and EIOPA to submit draft RTS on the review, revision and republication of the KID and timing of delivery of the KID

ESMA, EBA and EIOPA to submit the draft RTS on the content, presentation and calculation of information in the KID UCITS V Directive Jurisdiction: EU Status: Enacted FCA expected to publish a consultation paper on UK transposition of UCITS V Deadline for transposing UCITS V into national law

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Regulatory timeline -

Investment Management

Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016

Alternative Investment Fund Managers Directive (AIFMD) Jurisdiction: EU Status: Enacted ESMA to finalise guidelines on asset segregation ESMA to provide an opinion on the functioning of a number of the changes included in the AIFMD Commission may adopt delegated regulation regarding when passports for non-EU AIFs and AIFMS will be available

European Long-Term Investment Funds Regulation (ELTIF)

ESMA to submit

draft RTS ELTIF regulation starts to apply

Client Assets Review Jurisdiction: UK Status: Enacted The remaining rules and guidance announced in PS14/9 come into force

Regulation on Key Information Documents for PRIIPs

Jurisdiction: EU Status: Drafted EIOPA to deliver technical advice on delegated acts relating to temporary product intervention powers

ESMA, EBA and EIOPA to consult on draft RTS for the content, presentation and calculation of information in the KID

ESMA, EBA and EIOPA to submit draft RTS on the review, revision and republication of the KID and timing of delivery of the KID

ESMA, EBA and EIOPA to submit the draft RTS on the content, presentation and calculation of information in the KID UCITS V Directive Jurisdiction: EU Status: Enacted FCA expected to publish a consultation paper on UK transposition of UCITS V Deadline for transposing UCITS V into national law

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FCA Business Plan

The FCA’s business plan sets out to parliament, to consumers and to the

firms it regulates how it plans to pursue its objectives, what its priorities

are and how it will measure its success.

This year’s business plan was published ahead of some of the most fundamental changes to pension policy in a generation; in addition to the regulatory implementation of the Parliamentary Commission on Banking Standards recommendations on accountability. Consequently, the two themes underpin much of the discussion throughout the document.

In December 2014, the regulator changed its strategy, recognising that it needed a different approach to regulate such a large and diverse industry. The FCA now places more emphasis on sector and market-wide analysis to enable it to use the intelligence it has to focus on key priorities, while remaining flexible enough to respond to emerging issues.

The FCA’s three operational objectives remain the same: ‘to secure an appropriate degree of protection

for consumers, to protect and enhance the integrity of the UK financial system and to promote effective competition in the interests of consumers’.

Nevertheless, the regulator has identified the following priorities to ensure it achieves its objectives:

A strategic markets-led approach to regulation Protecting consumers

Individual accountability International issues

These priorities have been identified following a thorough and on-going assessment of the key risks to the financial services sector. In December 2014, the regulator made a commitment to take a more strategic approach to risk, as well as develop a common view of markets and key sectors.

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FINANCIAL SERVICES GROUP REGULATORY HANDBOOK | 2015 – 2016 17 In accordance with this, the FCA has identified seven forward-looking areas of

focus. Four of these areas are retained from the 2014/15 business plan, which continue to be of significant interest to the Regulator:

Technology may outstrip firms’ investment, consumer capabilities and regulatory response

Poor culture and control continue to threaten market integrity, including conflicts of interest

Large back-books may lead firms to act against their existing customers’ best interests

Pensions, retirement income products and distribution methods may deliver poor consumer outcomes

Consumer credit and complex terms and conditions were highlighted as forward-looking areas of focus in 2014. While the Regulator considers that these issues remain a theme, they have been expressed slightly differently, in line with experience gained over the past 12 months in which the FCA took over consumer credit regulation; and the changing environment around terms and conditions:

Poor culture and practice in consumer credit affordability assessments could result in unaffordable debt. This risk may increasingly affect younger people The range of issues that need to be considered in unfair contract terms is

given sharper focus by developments over the last year in legislation and legal precedents

One new area of focus is:

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The regulator has identified some key social and environmental risks for the

achievement of its objectives. Most of these risks are considered to be medium-term,

but some have been identified as being longer-term and require further assessment

before they can be fully understood. The list below details the key social and

environmental factors:

FCA Business Plan

Business conduct Policy, legislation and regulation Domestic policy Social factors Technological challenges

• Culture in firms • Consumer behaviours • Conflicts of interest, with a focus on wholesale markets • Financial crime • Unfair contract terms

• EU and International • Market infrastructure • Prudential • Shadow banking • Pension reforms • Consumer credit

• Ageing population and older consumers • Younger consumers

• Innovation in online and web-based channels • Cyber-crime • Complex systems with

intermediaries and/or gatekeepers • Market resilience

The regulator also included an analysis of the effect of key economic and market trends. In line with the FCA’s identified risks and priorities, the key activities for the upcoming year include:

Continuing to implement and review the consumer credit regime

Monitoring developments in technology and how this affects firms and consumers Examining the mortgage market following the introduction of the MMR

Continuing the work started in the wholesale markets

Using its power to act against anti-competitive behaviour, concurrent with the Competition and Markets Authority

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Key changes

Pensions reforms

In accordance with the substantial changes the market is going through, pensions will be a key area of focus for the FCA involving policy supervision, market studies and thematic work.

The reforms provide an opportunity for innovation in pensions products to meet changing consumer needs. Accordingly, the FCA will use the Innovation Hub as one of the key mechanisms to better understand these products in development.

The FCA has also identified a number of potential risks associated with the reforms. It states that, without appropriate information and guidance to empower consumers, greater choice and the offering of more complex products in the pensions market will reduce consumers’ confidence and appetite to shop around and so weaken competitive pressure on providers to offer good value. Furthermore, the FCA considers that there may be an increased risk of scams at the point of liberalisation and onwards. Consequently, much of the work the FCA will undertake will focus on vulnerable consumer groups of pensionable age.

Some of the work the FCA will undertake over the year includes:

Review the FCA’s rules in the pension and retirement area, including the new retirement risk warnings

Review the wake-up packs and introduce further measures to improve communication with pension savers, supporting choice and competition in the retirement income market

Review rules around disclosure for consumers using drawdown products and how these relate to the new freedoms to take lump sum withdrawals directly from pensions

Consult on new rules to ensure that all pension transfers advice will need to be carried out, or checked, by a Pensions Transfer Specialist

Review how firms have implemented the pension reforms to ensure the retirement income market functions effectively and works in consumers’ interests

Continue to address the issues from its 2014 review of firms’ annuities sales practices

Work with the Treasury in light of their consultation on the creation of a secondary market in annuities

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Individual accountability

Individual accountability has been a key theme in the financial services industry since the financial crisis. The FCA wants to ensure that senior individuals in positions of responsibility are held personally accountable for how their firm operates, and for the consequences of misconduct. Accordingly, it will continue to implement recommendations made by the Parliamentary Commission on Banking Standards.

The FCA has proposed a new regime to

strengthen accountability in banking to create a new framework for UK banks, building societies, credit unions and PRA-designated investment firms. The rules will make it easier for both firms and regulators to hold individuals to account. Increased individual accountability will improve behaviour, benefit consumers and markets, and can help restore public trust in the financial services industry. The FCA plans to publish final rules by the summer of 2015 and work with firms ahead of the changes, coming into effect by March 2016. It will also put in place a new accountability regime for incoming branches of

foreign banks. Finally, the regulator will also reform the existing accountability regime for insurance firms. Key aspects of the proposed rules include:

Chairmen and non-executive directors will be included as ‘senior management functions’ and will be held to account and deemed culpable for the ramifications of boardroom decisions ‘Prescribed responsibilities’ will be introduced and must be allocated to the most senior of those performing ‘senior management functions’. Individual statements of responsibility must be drawn up detailing the most senior executives’ roles

Firms must draw up a ‘management responsibilities map’, documenting its management and governance arrangements, including how the statements of responsibility have been allocated

The burden of proof will be reversed by a ‘presumption of responsibility’; firms must show that ‘reasonable steps’ have been taken to prevent, stop or remedy breaches

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FINANCIAL SERVICES GROUP REGULATORY HANDBOOK | 2015 – 2016 21 A ‘group entity senior manager’ will be introduced, covering individuals that

are employed by a parent, holding or other group undertaking who exercise significant influence over activities in the UK into the scope of the regime The FCA will also introduce a new certification regime to cover material risk-takers, those performing ‘significant harm functions’ and anyone supervising a certified person. Furthermore, a new framework of behavioural standards will be introduced, applicable to all individuals.

Ring-fencing

While the structural reform is not included in the FCA’s business plan as it is under the PRA’s remit, its effects will be felt throughout the banking industry in the upcoming year. The PRA is required under the Financial Services and Markets Act 2000 (as amended by the Financial Services (Banking Reform) Act 2013) to draft policy to implement the ring-fencing of core UK financial services and activities. The following proposals were included in its October 2014 consultation:

Legal structures of groups containing a ring-fenced body (RFB): RFBs should not own entities which conduct excluded or prohibited activities as this would expose the RFB to risks unrelated to the provision of core services. The PRA also proposes that RFBs are not owned by such firms to ensure the RFB is able to make decisions independently

The governance of groups containing an RFB: the PRA has proposed a number of rules in the areas of governance, risk management, internal audit, remuneration and human resources policy. Such functions underpin how RFBs make decisions and devise strategy which is critical; in particular, in enabling an RFB to take decisions independently of other group members Continuity of services and facilities: the FCA has proposed rules governing how RFBs can receive services and facilities from other intragroup entities or third parties outside their group. These are intended to mitigate risks to the ability of the RFB to perform its core services arising from the acts, omissions or the failure of other group entities

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UK Regulatory

Supervisors

Dual-regulated firms

eg deposit takers, insurers and

some investment firms

All other regulated firms

All other regulated Financial Services

firms eg investment managers

HM Treasury and Parliament

PRA

Subsidiary of the

Bank of England

PSR

Subsidiary

of the FCA

FCA

Work cooperatively

Prudential

regulation

Conduct and

Prudential

regulation

Ensures payment systems work in users’ best interests

Conduct

regulation

FCA directly accountable to HM Treasury and Parliament

Financial Policy Committee (FPC)

Provide recommendation with regard to financial stability

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Jurisdiction:

UK

Status:

N/A

Industry:

Cross Financial Services

In a nutshell:

The Financial Services Act 2012 enacted a number of reforms to the UK financial services regulatory framework. The Financial Services Authority (FSA) was replaced by the FCA and the PRA. The legislation also established an independent monitoring body that is a committee of the Bank of England, the Financial Policy Committee (FPC). Furthermore, one of the key proposals of the Financial Services (Banking Reform) Act 2013 was the establishment of a dedicated Payments Systems Regulator.

Core components:

The Financial Conduct Authority (FCA) is responsible for the regulation of the conduct of both retail and wholesale financial services firms. From 1 April 2015, the FCA has held new competition powers, allowing it to conduct market studies, investigations and enforce against breaches of the prohibitions on anti-competitive behaviour

The Prudential Regulatory Authority (PRA) which is a subsidiary of the Bank of England, is responsible for the prudential regulation of financial firms that manage significant risks on their balance sheets. Its purpose is to improve the stability of the financial system through supervision and regulation

The Financial Policy Committee (FPC) is an independent committee of the Bank of England, responsible for identifying, monitoring and taking action to remove or reduce systemic risks with a view to protecting and enhancing the resilience of the UK financial system

The Payment Systems Regulator (PSR) is a subsidiary of the FCA which became operational in April 2015. Its primary aim is to ensure payment systems and the regulatory framework operate in the best interests of service-users and the wider UK economy

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Joint Committee European Banking Authority (EBA) European Insurance and Occupational Pensions Authority (EIOPA) European Securities and Markets Authority (ESMA) National Banking Supervisors National Insurance Supervisors National Securities Supervisors

European Systemic Risk Board European Central Bank (ECB) National Supervisors National central banks European Supervisory Authorities (ESAs) Chairman of the Economic and Financial Committee (ECOFIN) European Commission (EC) Micro-prudential information Micro-prudential

supervision Macro-prudential oversight

Early risk warning and supervisor recommendation

European System of

Financial Supervision

In a nutshell:

The European System of Financial Supervision is the framework for financial services regulation in operation since 2011 across the European Union. The system was created as a response to the 2009 de Larosière Report aimed at strengthening European supervisory arrangements in order to better protect citizens and rebuild trust in the financial system. All financial services firms, markets, services, products and financial market infrastructures that fall within EU sectoral legislation are affected by the ESFS.

A key requirement of the reform is the obligation on the Parliament and the Council to assess whether

the ESFS is functioning as originally envisaged. In November 2014, the Council of the EU, in accordance with the Commission, agreed that the component parts of the ESFS were functioning well and there was no need for any major

amendments. Nevertheless, the Council supported the Commission’s recommendations for short-term improvements to the ESAs and the ESRB but suggested that these should be done in line with monitoring the effects of the SSM, the SRM and the EBU. Further findings will be reported by the end of 2016, in line with the next ESFS review.

European System of

Financial Supervision

(ESFS) reform

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Jurisdiction:

EU

Status:

N/A

Industry:

Cross Financial Services

Core components:

The European Systemic Risk Board (ESRB) – an independent body responsible for the macro-prudential oversight of the EU financial system. The ESRB’s day-to-day business is entrusted to the European Central Bank (ECB)

The following independent micro-prudential supervisors, known as the European Supervisory Authorities (ESAs):

– The European Banking Authority (EBA)

– The European Securities and Markets Authority (ESMA)

– The European Insurance and Occupational Pensions Authority (EIOPA) The Joint Committee of the ESAs, which deals with cross-sectoral issues The 28 EU Member States national supervisors, which carry out the day-to-day supervision of financial institutions, with a limited number of exceptions The European Banking Union (EBU):

– The Single Supervisory Mechanism (SSM) places the European Central Bank (ECB) as the central prudential supervisor of financial institutions in the euro area and any of the non-euro EU countries that choose to join the SSM. Colleges of supervision, permanent coordination structures that bring together regulatory authorities involved in the supervision of a banking group, will continue to play an important role for banks with a presence in non-SSM countries. When a bank operates only in SSM countries, it will be treated as ‘domestic’ and will, therefore, fall under the full responsibility of the SSM authorities

– The Single Resolution Mechanism (SRM) will apply to all banks covered by the SSM. Its primary purpose is to ensure an orderly resolution of failing banks with minimal costs for taxpayers and to the real economy – The Deposit Guarantee Scheme (DGS) requires EU Member States to introduce at least one deposit guarantee scheme in their jurisdiction to protect depositors and reduce the risk of bank runs

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Federal Reserve Board (FRB)

Office of the Comptroller of the Currency (OCC) Federal Deposit Insurance Corporation (FDIC)

Securities Exchange Commission (SEC) Commodities Futures Trading Commission (CFTC)

Consumer Financial Protection Bureau (CFPB) National Credit Union Administration

Federal Housing Finance Agency Non-voting members

Financial Stability Oversight Council (FSOC)

In a nutshell:

Financial institutions in the United States of America are regulated at both state and federal levels. The federal system of regulation was restructured as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act 2010. The primary federal agencies are listed overleaf; state banking, securities and insurance regulators also play a role in regulating financial institutions.

US Regulatory

Supervisors

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Jurisdiction:

US

Status:

N/A

Industry:

Cross Financial Services

Core components:

Financial Stability Oversight Council (FSOC) – the FSOC was created to identify risks to US financial stability, promote market discipline and respond to emerging threats to the stability of the US financial system

Federal Reserve Board (FRB) – the FRB supervises and regulates the Federal Reserve Banks, is responsible for the US’s payment systems, administers most of the US laws regarding consumer credit protection and supervises banking institutions and activities

Securities and Exchange Commission (SEC) – the SEC is independent of the government and is responsible for enforcing the federal securities laws. It regulates the majority of the securities industry, alongside investment advisers who are not covered by state regulators

Financial Industry Regulatory Authority (FINRA) – the FINRA is an independent organisation dedicated to investor protection and market integrity through regulation of the securities industry

Commodity Futures Trading Commission (CFTC) – the CFTC regulates the commodity futures and options markets in the US as well as securities futures Federal Deposit Insurance Corporation (FDIC) – the FDIC is an independent federal agency created to maintain stability and public confidence in the nation’s financial system by insuring deposits at federal and state banks, examining and supervising insured depositary institutions and managing the receivership of failed or failing depositary institutions

Office of the Comptroller of the Currency (OCC) – the OCC is an

independent office of the Department of the Treasury that charters, regulates and supervises all national banks. It also supervises the federal branches and agencies of foreign banks

National Credit Union Administration (NCUA) – the NCUA is an independent federal agency that regulates, charters and supervises federal credit unions Consumer Financial Protection Bureau (CFPB) – the CFPB was established to protect consumers by carrying out federal consumer financial law

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Cross

Financial

Services

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FINANCIAL SERVICES GROUP REGULATORY HANDBOOK | 2015 – 2016 29

Capital Requirements Regulation and Directive (CRD IV)

30 Dodd-Frank Wall Street Reform and Consumer Protection Act

32 European Market Infrastructure Regulation (EMIR)

34 FCA Review of Client Assets Regime for Investment Business

36 Financial Transaction Tax (FTT)

38 The Foreign Account Tax Compliance Act (FATCA)

40 The Fourth Money Laundering Directive (MLD4)

42 General Data Protection Regulation (GDPR)

44 Market Abuse Directive Legislative Package (MAD II)

46 Markets in Financial Instruments Regulation and Directive (MiFID) II

48 Network and Information Security Directive (NISD)

50 Revised Wire Transfer Regulation (WTR)

52 Securities Financing Transactions (SFT) Regulation

54 Target2-Securities (T2S)

56

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In a nutshell:

The CRD IV package is a major set of reforms to the EU’s capital requirements regime for credit institutions and investment firms. It has recast and replaced the Capital Requirements Directive with a new directive and regulation; the CRD IV Directive and the Capital Requirements Regulation (CRR).

The primary aims of the reforms are to implement the Basel III requirements, as well as introduce EU-specific reforms, for example the cap on bankers’ bonuses.

Core components:

CRR

The bulk of the reforms were included in the CRR, as a regulation, to prevent fragmented application by individual Member States. The CRR contains the Basel III reforms relating to: quality of capital, quantity of capital, counterparty credit risk, credit valuation adjustment risk and the leverage ratio.

The Capital Requirements

Directive (CRD IV) and Capital

Requirements Regulation (CRR)

2015 2018

During 2015

RTS and ITS to be adopted by Commission and published in the Official Journal

01.01 2016

Deadline for the EC to submit reports on extending the scope of the CRR

31.12 2015

Deadline for the EC to submit proposals on introducing NSFR and on introducing the leverage ratio

31.12 2016

Provisions in the CRD IV Directive on capital buffers will come into force

01.01 2018

Leverage ratio and the NSFR will apply

01.10 2015

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Jurisdiction:

EU

Status:

Enacted

Industry:

Cross Financial Services

FINANCIAL SERVICES GROUP REGULATORY HANDBOOK | 2015 – 2016 31 The EU-specific requirements include:

Single Rulebook – a single set of harmonised prudential rules for banks and investment firms; most national discretions have been removed

Supervisory reporting requirements – two supervisory reporting frameworks: Common Reporting (COREP) and Financial Reporting (FINREP)

Credit risk adjustments – sets out how firms should treat general credit risk adjustments and specific credit risk adjustments

Pillar 3 disclosures – firms must make a significantly higher number of public disclosures

CRD IV

CRD IV, which must be transposed by all Member States, contains less prescriptive provisions where harmonisation with national law is more important. The capital conservation buffer, countercyclical buffer and liquidity requirements of Basel III were implemented through CRD IV. EU-specific reforms include:

Corporate governance – new requirements relating to management bodies and arrangements and increased Pillar 3 disclosures about such arrangements Remuneration – reforms relating to bonuses, ‘golden hellos’, website display of compliance with remuneration requirements and disclosure requirements Reliance on external ratings – measures intended to reduce the reliance by credit institutions on external credit ratings

Country-by-country reporting – firms must report prescribed information for each financial year

Supervisory review and evaluation process (SREP) – all CRD IV firms will be subject to the SREP at least every three years from 2016. Institutions will be scored on the following elements: business model analysis, assessment of internal governance and institution-wide control arrangements, assessment of risks to capital and adequacy of capital to cover these risks and assessment of risks to liquidity and adequacy of liquidity resources to cover these risks

2015 2018

During 2015

RTS and ITS to be adopted by Commission and published in the Official Journal

01.01 2016

Deadline for the EC to submit reports on extending the scope of the CRR

31.12 2015

Deadline for the EC to submit proposals on introducing NSFR and on introducing the leverage ratio

31.12 2016

Provisions in the CRD IV Directive on capital buffers will come into force

01.01 2018

Leverage ratio and the NSFR will apply

01.10 2015

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In a nutshell:

The Dodd-Frank Act was enacted to put in place a wide-ranging reform of the US financial regulatory system, affecting most aspects of the US financial services industry. Many of the provisions of the Act affect UK entities directly, particularly any that do business in the US or with US citizens.

The Dodd-Frank Act was enacted into law on 21 July 2010 but due to its wide-ranging nature and multiple compliance dates, no definitive timeline can be produced. As at the end of the fourth quarter of 2014, a total of 277 Dodd-Frank rulemaking requirement deadlines have passed. Of these 277 passed deadlines, 101 have been missed and 176 have been met with finalised rules.

Dodd-Frank Wall Street

Reform and Consumer

Protection Act

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Jurisdiction:

US

Status:

Enacted

Industry:

Cross Financial Services

Core components:

The Volcker Rule – The Dodd-Frank Act implemented the Volcker Rule, which generally prohibits certain ‘banking entities’ (and their affiliates and subsidiaries) from engaging in proprietary trading and acquiring or

retaining any ownership interest in, or sponsorship of, hedge funds or private equity funds

Regulatory structure – includes provisions that overhaul the US financial regulatory system, including the creation of the Financial Stability Oversight Council, the elimination of the Office of Thrift Supervision and the overhaul of the Federal Reserve Bank, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, Bureau of Consumer Financial Protection and other agencies

Swaps and derivatives – addresses perceived shortcomings in the over-the-counter (OTC) derivatives markets. The primary goals are to minimise systemic risk of derivatives trading, create transparency in derivatives markets and provide credit protection for derivatives traders

Bank capital (Collins Amendment) – minimum leverage capital and risk-based capital requirements for depositary institutions and holding companies Credit rating agencies – measures imposed on rating agencies relating to their

internal controls, conflicts-of-interest, transparency and accountability Securitisation – seeks to address certain perceived flaws in securitisation

market practices

Private equity and hedge funds – imposes measures relating to hedge funds, private equity and venture capital funds and other private investment funds and the entities managing these funds

Regulation of systemically significant financial institutions – supervises and regulates banks and other financial companies that could pose a threat to the stability of the US financial system

Corporate governance and executive compensation

SEC Authority and Selected Securities Act and Exchange Act Provisions Resolution of failing financial institutions

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The European Market

Infrastructure Regulation

(EMIR)

2015 2019 01.07 2015

Long stop date for reporting any derivatives for which a trade repository is still unavailable

01.12 2015

Anticipated date for variation margin requirements for uncleared derivative trades to come into effect

Initial margin requirements expected to be phased in

01.12 2015 – 01.12 2019

In a nutshell:

The European Market Infrastructure Regulation (EMIR) is an EU regulation on Over The Counter (OTC) derivatives, Central Counterparties (CCPs) and Trade Repositories (TRs). It aims to improve the management of counterparty credit risk and increase trade transparency within the derivatives market. EMIR, the EU equivalent of similar provisions made within the US Dodd-Frank Act, has been brought into force in response to weaknesses exposed in the global financial system after the default of Lehman Brothers, near-collapse of Bear Stearns and events surrounding AIG in 2008. The interconnectedness of OTC derivative participants and the default, or fear

of default, led to liquidity problems, compounded by a lack of transparency of positions and exposures to both regulators and market participants.

Key objectives of EMIR include:

Reduce the interconnectedness between counterparties in the OTC derivatives markets, minimising systemic risk

Provide the regulatory framework needed to improve counterparty risk management Create transparency for regulators and

participants within the OTC derivatives market, minimising transparency risk

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Jurisdiction:

EU

Status:

Enacted

Industry:

Cross Financial Services

Core components:

Imposing new clearing requirements for specified standardised OTC derivative trades – mandating the clearing of eligible OTC derivatives through a CCP

Introducing risk mitigation requirements for trades that are not centrally cleared by a CCP – trades not cleared through a CCP (Non-Cleared) will incur collateral requirements and/or higher capital charges

Setting reporting requirements for all derivatives trades (exchange traded and OTC) – reporting of derivative transactions to Trade Repositories (TRs) Introducing new obligations on Central Counterparties (CCPs) – including

an authorisation process, supervisory requirements and interoperability arrangements between CCPs

Imposing new obligations on Trade Repositories (TRs) – including a registration process and requirements on operational reliability, transparency and protection and availability of trade data

2015 2019

01.07 2015

Long stop date for reporting any derivatives for which a trade repository is still unavailable

01.12 2015

Anticipated date for variation margin requirements for uncleared derivative trades to come into effect

Initial margin requirements expected to be phased in

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In a nutshell

In response to concerns that a number of firms were still failing to comply with fundamental requirements regarding recording the client assets they held and segregating them according to the FCA’s Client Assets Sourcebook, the FCA conducted a wide review of its client assets regime for investment business.

The final proposals, published in June 2014, cover the entire operation of the client money and custody rules for investment firms that hold client money, custody assets, collateral and/or mandates in

relation to investment business. The changes include a rewrite of client money rules for investment firms and substantial amendments to custody rules in the Client Assets Sourcebook.

The aims of the proposals were to: Address specific risks

Clarify the requirements firms must comply with Enhance the client assets regime to achieve better results for consumers and increase confidence in financial markets

FCA review of client

assets regime for

investment business

2015 2016

The remaining rules and guidance announced in PS14/9 come into force

01.06 2015

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Jurisdiction:

UK

Status:

Enacted

Industry:

Cross Financial Services

Core components:

Speed proposal – the FCA will not proceed with its proposals on client money distribution rules but will keep these under review in line with HMT’s implementation of Special Administration Regime recommendations

Delivery versus Payment (DVP) – the DVP window has been retained for settling transactions in collective investment schemes, but has been reduced to one day and firms must also obtain each client’s consent to their assets or monies being held within the DVP window

Format and frequency of reconciliations – the format of internal client money reconciliations is being clarified with the requirement to perform these daily and external reconciliations at least monthly

Unbreakable term deposits – unbreakable fixed term deposits will be limited to a maximum of 30 days

Mandate rules – the requirement for firms to retain the mandate records indefinitely has been removed and replaced with retention requirements of at least one year, or at least five years if the mandate was obtained in connection with MiFID business

Acknowledgement letters for client money bank accounts – a new template for acknowledgement letters will be introduced alongside a requirement to re-paper existing acknowledgement letters and to have these letters in place before starting to use any new bank account which is opened to hold client money

Due diligence – additional due diligence will be required for banks with whom client money is held

Immediate segregation – firms following the normal approach will generally be required to receive all client money directly into a client bank account Cleared funds – the FCA is reiterating the principle that one client’s money

should not be used to fund another client’s investment business

2015 2016

The remaining rules and guidance announced in PS14/9 come into force

01.06 2015

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In a nutshell:

In September 2011, the European Commission proposed a harmonised Financial Transaction Tax for the EU. This was in part due to Member States expressing a desire to ensure the financial services sector was appropriately contributing to public finances. It was also intended to be the first step to introducing a global financial transaction tax. It is estimated that the FTT will generate an annual revenue of EUR31 billion.

The primary objectives of the proposal were: To encourage harmonisation across the Single

Market and therefore avoid the fragmentation associated with separate legislations for each jurisdiction

To ensure that the financial sector was

contributing to public finances and repaying part of what it received from taxpayers during the financial crisis

To discourage inefficient financial transactions

Not all Member States of the EU agreed to go ahead with the proposal so the European Commission allowed a subgroup of Member States to engage in discussions (under the EU’s Enhanced Co-operation procedures) about introducing a harmonised Financial Transaction Tax. This subgroup, the ‘EU11’, comprises: Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia and Spain.

Whilst France and Italy introduced local FTT regulations in 2012 and 2013, respectively, it was widely believed that plans for the EU-wide FTT had been shelved. Nevertheless, in January 2015 10 Member States (the EU11 minus Greece) issued a joint statement renewing their commitment to reaching an agreement for the FTT ready for implementation on 1 January 2016.

Financial Transaction

Tax (FTT)

2015 2016 Planned FTT implementation date 01.01 2016

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Jurisdiction:

EU

Status:

Proposed

Industry:

Cross Financial Services

Core components:

A levy of at least 0.1 per cent on stock and bond trades based on transaction value

A levy of at least 0.01 per cent on the notional value of derivative transactions between financial institutions

The FTT is intended to apply on the basis of the residence principle. Thus, the tax will apply if at least one institution is located in the territory of a participating Member State. However, to further minimise the risk of relocation of transactions, this will be supplemented by elements of the issuance principle. Therefore, for transactions in certain financial instruments, the persons involved should be considered established in the participating Member State in which the instrument has been issued.

The legality of the EU Financial Transaction Tax legislation has frequently come under debate. This includes a challenge lodged by the UK at the European Court of Justice in April 2013 regarding the appropriateness of using the Enhanced Co-operation process in the light of the extra-territorial aspects of the Commission’s proposal. The Commission and several participating Member States rebutted the claims that the harmonised FTT framework would contain provisions with inappropriate extraterritorial effects or not respect the rights of non-participating Member States. Once agreed upon at European level, participating Member States will have to transpose the Directive into national legislation. 2015 2016 Planned FTT implementation date 01.01 2016

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In a nutshell:

The Foreign Account Tax Compliance Act (FATCA) is a set of requirements that was introduced to identify US taxpayers using foreign accounts to avoid tax by obligating Foreign Financial Institutions (FFIs) to report information relating to these account holders. The purpose of FATCA is to ensure the Internal Revenue Service (IRS) can identify and collect the appropriate tax from any US taxpayer holding financial assets outside of the US. FATCA applies to any financial institution,

including banks, investment managers, funds and insurers, and introduces ever higher levels of client identification and compliance to avoid the threat of a 30% withholding tax being applied to many types of US sourced funds. Additionally, many jurisdictions have signed up to Intergovernmental Agreements (IGAs) with the US whereby FATCA provisions are adopted into domestic legislation which also includes the threat of domestic penalties being charged to local FFIs who are non-compliant.

The Foreign Account Tax

Compliance Act (FATCA)

2015 2017

31.05 2015

30.06 2015

First UK FATCA reporting submission deadline 01.01 2016 CRS starts 30.05 2016 UK FATCA reporting submission deadline in respect of 2015. First and only UK UK-CDOT reporting submission deadline in respect to the period from 1 July 2014 to 31 December 2015

31.03 2017

IRS FATCA reporting submission deadline in respect of 2015

Deadline for FATCA due diligence on pre-existing accounts exceeding $1 million held byindividuals 31.05 2015 UK FATCA reporting submission deadline in respect of 2015. First UK CRS reporting submission deadline 31.03 2016

IRS FATCA reporting submission deadline, with respect to calendar year 2015

30.06 2016

FATCA due diligence to have been completed on remaining pre-existing accounts that need to be reviewed

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Jurisdiction:

Global

Status:

Enacted

Industry:

Cross Financial Services

Core components:

FFIs – to avoid being withheld or reported on, FFIs must register with the IRS and agree to report certain information about their US accounts, including accounts of certain foreign entities with substantial US owners, to the IRS or their domestic tax authority. In certain circumstances FFIs may be required to withhold 30% on certain payments to FATCA non-compliant foreign payees. Categories of FFIs that are exempt from FATCA include: governmental entities and not for profit organisations. Unless otherwise exempt, FFIs that do not register and agree to report can face a 30% withholding tax on certain US-source payments made to them

Non-Financial Foreign Entity (NFFE) – if not an FFI, an entity will be considered an NFFE which will be further classified as Active or Passive, depending on the type of income derived. If Passive, the NFFE will be required to disclose further information on its owners to its financial counterparties IGAs – the US has collaborated with other governments to develop two

models of IGAs to implement FATCA. These demand that governments bring in domestic legislation that will require all FFIs to identify US accounts and report information about these and any non-compliant persons/entities to the IRS or the local tax authority

Impact – the requirements of FATCA mark a seismic shift in the exchange of information worldwide. Almost all companies will be affected, requiring an analysis of their classification under FATCA, the possible consequential registration, due diligence, changes to client onboarding, detailed reporting and, where not in a Model I IGA jurisdiction, 30% withholding on US income and gross proceeds (from sale of assets that produced interest or dividends) for the non-compliant

Expanding obligations – the future compliance burden arising from two similar information exchange regimes (the intergovernmental agreements between the UK and Crown Dependencies (UK-CD/OT) and the OECD’s Common Reporting Standards (CRS)) means that this new level of information exchange will abide. The OECD’s Common Reporting Standard is due to commence in early adopter countries on 1 January 2016 with first reporting in 2017. Under CRS much more information must be reported to local tax authorities resulting in FFIs having a much larger compliance burden

2015 2017

31.05 2015

30.06 2015

First UK FATCA reporting submission deadline 01.01 2016 CRS starts 30.05 2016 UK FATCA reporting submission deadline in respect of 2015. First and only UK UK-CDOT reporting submission deadline in respect to the period from 1 July 2014 to 31 December 2015

31.03 2017

IRS FATCA reporting submission deadline in respect of 2015

Deadline for FATCA due diligence on pre-existing accounts exceeding $1 million held byindividuals 31.05 2015 UK FATCA reporting submission deadline in respect of 2015. First UK CRS reporting submission deadline 31.03 2016

IRS FATCA reporting submission deadline, with respect to calendar year 2015

30.06 2016

FATCA due diligence to have been completed on remaining pre-existing accounts that need to be reviewed

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In a nutshell:

The Fourth Money Laundering Directive is a European minimum harmonising directive designed to further strengthen the EU’s defences against money laundering and terrorist financing. The directive will amend and replace the Third Money Laundering Directive, introduce a more risk-based regime and align the EU framework with the FATF standards.

The Fourth Money

Laundering Directive (MLD4)

2015 2017

06 2015

New regime to apply

Mid 2017 2015 - 2017

European Commission and Joint Committee of the ESAs to develop and publish level 2 measures and level 3 guidelines under MLD4 MLD4 expected to be published

in the OJ, and to come into force 20 days after publication

(43)

Jurisdiction:

EU

Status:

Enacted

Industry:

Cross Financial Services

Core components:

Extending scope – all persons dealing in goods for cash payments of

EUR10,000 or more will now be within its scope, as will the gambling sector. Tax crimes will be added as a predicate offence

Politically Exposed Persons (PEPs) – the proposals extend the definition to include domestic as well as foreign PEPs, and those within international organisations

Beneficial owner information – the clarity and accessibility of beneficial owner information will be enhanced. Member States will need to ensure that beneficial ownership information is stored in a central register

Customer Due Diligence (CDD) – equivalency will no longer apply, there will no longer be automatic exemptions for the CDD requirements. Institutions will need to conduct their own risk assessment to decide whether simplified or enhanced due diligence measures can be applied

Risk-based approach – the MLD4 will introduce the concept of a national risk assessment, which must be made available to regulated firms and other Member States on request. The MLD4 will continue the move away from a more rules based approach to a risk based approach

Reinforcement of sanctioning powers – the MLD4 introduces minimum sanctions for firms which breach certain key provisions of the Directive. Member States must implement sanctions which are effective, proportionate and dissuasive

Home and host supervisory responsibilities – the MLD4 clarifies home and host country responsibilities, where a group operates in more than one Member State

Financial intelligence units – the MLD4 will extend the powers of Financial Intelligence Units and strengthen their co-operation across jurisdictions Data protection – MLD4 will improve the balance of AML and CTF

requirements with data protection requirements, and clarify the interaction between the two

2015 2017

06 2015

New regime to apply

Mid 2017 2015 - 2017

European Commission and Joint Committee of the ESAs to develop and publish level 2 measures and level 3 guidelines under MLD4 MLD4 expected to be published

in the OJ, and to come into force 20 days after publication

Financial Services Group. Regulatory handbook